Bank of England Eases 100 Basis Points

December 4, 2008

The Bank of England met the minimum market expectation but did not match last month’s 150-bp ease or today’s earlier move by the Swedish Riksbank. The British Bank Rate now becomes 2.0%, down 300 basis points in the past two months and off 375 basis points from peak counting cuts of 25 bps each last April, February, and December 2007.

A lengthy statement accompanying today’s action did not imply that further monetary relief would not be necessary, as the Swedish Riksbank suggested. On the contrary, officials still believe “there remains a substantial risk of undershooting the 2% CPI inflation target in the medium term.” From that, it is safe to infer that more rate cuts are coming, and a sub-1% end-point is possible. Nothing startling pops out of the description of the outlook for growth, inflation, and financial market conditions. Britain’s “downturn has gathered pace,” inflation expectations have fallen sharply, CPI inflation will continue to recede, and money and credit market conditions “remain extremely difficult.” Since last month’s quarterly analysis, the path of future inflation has been affected by some upside but also some downside forces that more or less cancel out. The government’s temporary VAT cut introduces some distortions that officials considered in acting as they did today, and fiscal stimulus on the whole is believed unlikely to leaving any lasting impact on inflation.

The statement does not warn about the danger of a rout on sterling and identifies depreciation as one factor that may blunt the recession. Minutes of today’s meeting, including the vote which I expect was unanimous, will be released on December 17th.



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